An exodus of benefit recipients from high to low cost neighbourhoods is a widely predicted side effect of the government's controversial welfare ceiling. This £26,000 annual limit, will force thousands to move to cheaper areas as the long-standing principle that housing payments should cover rent completely is dissolved by ministers next year, worried policy analysts claim.

Much less has been said about those who decide to stay put and struggle on. A report published by the Pro-Housing Alliance casts new light on the effect of diminished welfare support on a group officially accepted as the hardest hit by the cap: the 1.4 million private renters.

Private rented properties are already characterised by poor, cramped conditions, and barely affordable rents, the study Poor Homes, Poor Health, claims. "Many homes in the private rented sector are not decent," it says, pointing to official figures that show 1.36m privately rented properties are poor quality. Overcrowding rate tip 5%, more than all other sectors, including council housing or owner occupation.

According to the research, the recent price hikes in private rents has made matters deteriorate for private renters, who "choose to remain living in cold and unsafe housing fearing complaints may lead to eviction or higher rents.

"Feelings of insecurity are heightened which, combined with trying to live on a small budget, contribute to increased levels of stress and anxiety."

Private renters are also at greater risk of social isolation as they increasingly borrow from close acquaintances to meet day-to-day living expenses. "They feel increasingly isolated from the world," the research says. "Debt damages relationships with families and friends and they cannot afford to socialise."

Report author Gill Leng, a director of consultancy GLHS, says the vast majority of private tenants interviewed in depth as part of the study reported deteriorating mental health. "The effect this is having on people's health is quite shocking," she explains, adding that 95% of the 19 people they spoke with suffered from anxiety, stress or depression."

One of the renters, who worried about their mental health, told researchers: "I don't enjoy life as I don't have money to pay for things, my concentration is affected and I have become very reclusive." Another said: "I worry about making ends meet every day. It makes me anxious and has made my depression worse. I don't have enough money to see people. It's a struggle."

Private renters faced with ever-shrinking benefit support now face a downward spiral towards poorer health and wellbeing, according to Leng. "The government [stance] is that people have choices but the choices people have will all have a detrimental effect."

The report does carve out an important role for local authorities, landlords, healthcare providers and mental health charities. They could together help to alleviate any negative effects by working out ways to improve the mental health and wellbeing of private renters. Liverpool council's "healthy homes" programme, which aims to address health problems among private renters, is cited as an example of particularly good practice (see below).

Research certainly suggests that councils could do more to help private rented tenants to prepare and cope with the incoming onslaught of welfare cuts. Private renters are largely in the dark about the housing payment shakeup, according to a report by the National Audit Office published earlier this month. Almost 90% knew "not very much or nothing at all" about the changes to come.

There is another good reason why councils will have to increasingly take the links between housing and health more seriously: from April next year they will inherit public health duties from primary care trusts.

This power transition creates an "huge opportunity" for councils to alleviate the problems of poor health in the private rented sector, according to Angela Mawle, co-ordinator of the health, housing and fuel poverty forum. "Nothing can stop the effect. We have dwindling resources. We need, however, to maximise them by working together more efficiently."

In focus: Liverpool healthy homes

This pioneering programme was established by the city's council and primary care trust to improve housing conditions, particularly in its 148,000 private rented homes. Almost a third of these households struggle to pay their fuel bills; nearly a fifth of such homes are assessed as having a "serious housing hazard".

Liverpool's healthy homes advisers visit tenants in their homes, offering help to "health proof" their home by identifying ways to reduce cold, damp, mould and safety hazards.

"Liverpool has among the highest mortality rates, lowest life expectancies and greatest health inequalities nationally," says Phil Hatcher, the programme's business manager. "Liverpool primary care trust had an overriding commitment to help reduce health inequalities in Liverpool ... healthy homes fits very well with the new public health responsibilities moving into the local authority."

•This article was amended on 16 November 2012. It previously referred to Angela Mawle as co-ordinator of the Royal College of Physicians' (RCP) health, housing and fuel poverty forum. Sir Richard Thompson, president of the RCP, chairs the forum in a personal capacity.

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